HALA AL KARIB – The revolution continues and Sudanese women are at the forefront of resistance

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A consistency check is an assessment of the extent to which legal instruments such as the digital services tax (DST) meet their own stated objectives effectively, efficiently and efficiently. As the economic crisis hits and Kenya’s debtors begin to call, the extent to which the Kenyan government is consistent in its regulation is directly linked to Kenya’s social and economic stability. While government regulation can be convoluted, the consistency check framework makes it clear what the regulation means to you.

The DST, which came into effect on January 1, 2021, is a 1.5% tax on the gross transaction value of all digital products and services in Kenya. The inexhaustible range of products and services covered by this tax ranges from downloadable content to data analysis services. Reduced to its fundamental regulatory vocation, the DST is a transfer of wealth from private actors in the digital sector to the government. The short term objective of the DST is to increase the tax base while the long term objective can be seen as an increase in tax revenue. How then is a 1.5% tax on digital products, services and markets consistent with its own goals?

I meet Ndunge at his second-hand clothes stand in a busy part of town, as I collect a part. Since the first COVID-19 lockdown, she has had to create an account on a popular social media app to find new markets, make sure she doesn’t lose her customers in the long run and most importantly, to survive the downturn. of demand in it. sector. Ndunge’s online clothing sales are technically subject to DST. She rejects my questions about daylight saving time with “vile itakam” (whatever it is). Ndunge is required to submit daylight saving time declarations by the 20th of each month, but it will not do so. She is surprisingly disengaged from a fiscal rule that is imbued with the potential to destroy a business she has painstakingly built. Our digital service provider explains that the government is not justified in its pursuit of 1.5% of all its business, a view that she assures me is almost ubiquitous among her colleagues. The dismissive bitterness that frames his opinion of the government and its taxes is a sign that his political disillusionment is turning into something far more sinister.

DST is a transfer of wealth from private actors in the digital sector to the State.

Philosophically, Ndunge entered into a social contract with the government of Kenya when she started her business. She expected, consciously or not, to receive a set of public services – access to political decision-making and a voice in tax burden sharing in return for her taxes. His perceived imbalances in this transaction, coupled with persistent allegations of corruption in government, created a legitimacy vacuum. Legitimacy is the key ingredient in the administration of tax or any enforcement law. It motivates compliance, encourages group discipline in adherence to rules, and significantly reduces enforcement and oversight costs for regulators. Without legitimacy, the government of the day must use violence, legal or otherwise to achieve its compliance goals, and I guess in Ndunge’s case it will have to.

To violently compel Ndunge and the 86 percent of Kenya’s informal sector workforce to comply with the DST, the government will undoubtedly need to invest significant resources in the fiscal infrastructure required to register, motivate and monitor conformity. Since DST is an experimental tax, even in jurisdictions with strong fiscal infrastructure and legitimacy, this significant public investment will need to be undertaken without a clear return on investment.

Based on the above, the first question that arises about DST is its effectiveness.. The decision to regulate must first be informed by an assessment of the coercive force necessary to achieve the goal of greater fiscal coverage and increased tax revenue. As illustrated by the above, the government’s lack of legitimacy, the required investment in fiscal infrastructure, and the unclear return on investment raise questions about the feasibility of DST.

Daylight saving time is designed as a prescriptive rule by the Kenya Revenue Authority (KRA) that requires the regulatory target (digital products and service providers) to register and submit their monthly daylight saving time declarations in accordance with the 2020 finance law. However, a glaring design flaw is the general DST allowance of 1.5 percent of the transaction value for all digital activities, with no differentiation in revenue / turnover thresholds. The failure of the KRA to prioritize regulatory objectives or identify categories of digital services / products to reserve is, above all, punitive for local digital micro, small and medium enterprises (MSMEs). Pitting the compliance capacity of multinational digital content providers against the limited resources of MSMEs is not only amoral, but it is the sabotage of the objectives of the KRA.

In the absence of clear regulatory priorities, the KRA faces a system capacity overload, where regulatory resources are too dispersed to successfully target, motivate and monitor compliance. The resulting natural balance is the committed non-compliance of MSMEs, the backbone of Kenya’s economy and the main regulatory target. Simply put, there is no incentive for an average Kenyan lifestyle blogger without the technical ability to calculate and engage with and comply with DST regulatory requirements. Plus, to expect it to cost the blogger the same as it does Netflix is ​​nonsense. The DST is here manifestly ineffective in pursuing its own objectives.

In addition to alienating the main actors generating tax revenue in this jurisdiction, the DST will inevitably have a “deterrent effect” on the sector. First, in the short term, there is a loss in consumer welfare as digital players have done and will be who can shift the cost of DST to consumers. The most perverse effect of DST, however, is the loss of the “silicon savannah”, the unregulated space of digital innovation, with global recognition and ramifications.

Pitting the compliance capacity of multinational digital content providers against the limited resources of MSMEs is not only amoral, but it is the sabotage of the objectives of the KRA.

There is a sickening but almost heartwarming familiarity to the ruin of exceptional things, people and spaces in this country. The sequence is clear: A new and disruptive idea, technology, market or product is created and the novelty is exploited by the poorest to create capital. The now productive sector is attracting the attention of the government, which exercises its monopoly power over regulation. Gradually, the inefficiencies of the “Kenyan experience” emerge as the incentives to innovate, grow and create are strangled. The capital previously owned and generated by innovators finds its way back to the political class and the sector withers, the status quo is maintained. Unfortunately, this is how ‘the cookie crumbles’ in the digital product / service industry – inefficiencies that have weighed on other industries are finally found in the digital space. The distributive injustice of DST towards young people, MSMEs and other disenfranchised groups is all the more compelling when viewed in light of the rampant distortions of corruption in this jurisdiction. Indeed, this tax is a perverse redistribution of resources from the most efficient interest group – private actors in the private sector – to the government. DST is in this case clearly predatory while retarding the growth of the sector.

As a political analyst, I wonder what the strategic regulatory intent of the DST was when considering its cost / benefit gap. While the benefits of DST accrue to the government, digital financial service providers enjoy it by way of exemption. It should be noted that digital financial service providers are the main beneficiaries of a previously unregulated digital sector. Digital financial service providers developed their products in a regulatory vacuum and created the economies of scale that now allow them to compete internationally. As the most profitable economic entities in Kenya and perhaps the East African Community, why should they be exempt from DST? The economic rationale for this exemption is unclear, as these financial service providers experience glut of profits after recouping their investments in digital infrastructure. The undeniable interest group politics are at play here, calling into question the regulatory intent of this tax.

The most perverse effect of DST, however, is the loss of the “silicon savannah”, the unregulated space of digital innovation, with global recognition and ramifications.

A consistency check on the digital services tax illustrates the ineffectiveness, ineffectiveness and ineffectiveness of its intent, design and effects. I find that the government’s lack of legitimacy is likely to favor committed non-compliance among regulatory targets. Therefore, for the KRA to achieve its regulatory goals, it must resort to legal violence. Additionally, the general layout of the DST is a limiting design feature that discourages compliance, creates perverse incentives, and stunts growth and innovation in the industry. These skewed results all ensure that the KRA’s fervent attempts to substantially increase fiscal reach fail. Finally, the exemption of digital financial service providers from the scope of the DST is indicative of interest group policies in the sector that are destructive to growth and innovation.

Given the negative effects of DST, MSMEs and other interested stakeholders in the sector face the rising tide of inconsistent regulations by urgently organizing and engaging in the regulatory process. The recent increase in internet taxes (2021 Finance Law) is an indication that the government will not relax its redistribution efforts. Digital service providers should form a clearly defined interest group as only through preemptive engagement with the Ministry of Information, Communication and Technology on its policies, positions and instruments can they have the analytical and relational ability to isolate themselves from predation, in line with their contemporaries in the digital financial services industry.

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